Paul F White v. Minister of National Revenue, [1979] CTC 2065, 79 DTC 99

The Assistant Chairman:—For each of the 1972, 1973 and 1974 taxation years, Paul White (the appellant) filed the requisite individual income tax return as required by the Income Tax Act, SC 1970-71-72, c 63. Insofar as it is relevant to this appeal, he did not show, if called for, in what province he worked; whether or not he was self employed; where the business was located; or, except for the 1974 income tax return, the type of work or occupation or the name of present employer, if he were employed. For the 1974 taxation year he stated as to occupation that he was a manager and as to his present employer the name “Palmak Ltd.” (hereinafter called “Palmak”) was shown. For each of the said years, again insofar as it is relevant, his only income shown was his salary as an employee.

Palmak also filed the appropriate income tax return with all required financial statements for each of the said years. It should be noted that Palmak’s fiscal year coincided with the calendar year. As I read each income tax return and financial statement, I noticed that there was no statement as to what the business activity of Palmak was and I noted each was signed, apparently in the name of P F White, although the typewritten name was Paul White or Paul F White.

It would appear that all six above-mentioned income tax returns were accepted by the Minister of National Revenue as filed until April 1976, when all six returns were reassessed by him. By Notices of Reassessment dated April 12, 1976, insofar as the appellant was concerned, and April 15, 1976, with respect to Palmak, each was reassessed for the said years. In substance (detail will follow) the reassessments had the effect of saying that the appellant was not an employee of Palmak and that Palmak did not carry on a substantial business in each of the said years. The appellant’s income was substantially increased and Palmak’s substantially reduced. Strangely both objected and, following confirmation by the Minister, both appealed to the Tax Review Board. I was advised that both appeals were to be heard on the same evidence.

In substance, as the appeals were presented to me, it was submitted that if the appellant were successful I was to allow his appeal and order the respondent to assess him as filed. This is usual if an appeal pursuant to section 171 of the Income Tax Act were allowed. However, with respect to Palmak, the presentation to me was that if I were to allow its appeal, I should tell the respondent to reassess it to increase, not decrease, its tax for each year. It appears to me that an appeal to this Board pursuant to the provisions of the Income Tax Act is by a person who, in his or its opinion, has been oppressively assessed to tax and that appellant has asked this Board for relief, not to increase but to reduce the tax it was assessed. Were I to allow the appeal of the appellant, counsel for Palmak—who also acted for the appellant—and counsel for the Minister agreed I could give such an order as would be needed to achieve Palmak’s goal. Should it be that the appellant were successful in his appeal (in whole or in part), both counsel agreed that Palmak would also be equally successful. As to the problem raised by counsels’ request re Palmak, this mater shall be resolved further in these Reasons for Judgment or, if a further statement is required then separate Reasons for Judgment shall be given in that appeal.

The appellant is a qualified optometrist. He was graduated from the optometric school connected with the University of Toronto in 1964. Following graduation, he served his internship or apprenticeship in Halifax, Nova Scotia, and was duly licensed to carry on his profession in that province. In the late summer or early fall of 1964 he was offered “employment” by “Tuma Optical” in the City of Corner Brook in the Province of Newfoundland. He accepted the same and, after a period of apprenticeship in that province, was duly licenced in or about November 1964. For information purposes only, the appellant, whom I presume was born and raised in the Province of Nova Scotia, liked not only Corner Brook but also the Province of Newfoundland and decided to live there and has continued to do so.

The appellant remained in the employment which he had accepted at Corner Brook in the fall of 1964 until the spring of 1965 when he left and, with a Max Musseau who was an optician with Tuma Optical, went into a business in partnership, further particulars of which will be mentioned later. It should be understood that the appellant was an employee and was practising his profession while an employee and he really was not certain, from a legal point of view, who his “employer” was. I conclude he was interviewed and hired by an individual in the fall of 1964 and he “thought” he was working for “Tuma Optical”. He presumed he was working for Elias Tuma but later learned that “Tuma Optical” was the name under which S E Tuma Ltd carried on business. His evidence was that all bills (I presume to patients and not to the business) were in the name of “Tuma Optical”. He did not know initially that the business was owned by S E Tuma Ltd. He was employed at a stated salary per year and, as far as he knew, there was never an optometric licence in the name of his “employer”.

So that further evidence may be fully appreciated without in any way determining what becomes the issue in this appeal, the appellant is still, as of the date of hearing of his appeal (July 1978), practising his profession in the Province of Newfoundland. From 1967 until 1975, he was a member of the Newfoundland Optometrical Board and, for three of those years (1970-72), was the president of it. That Board was created pursuant to what is now the Optometry Act, RSN 1970, c 281 as amended. The appellant stated (and his counsel did not refer to any Act) that there was no provincial Act licencing, regulating or governing “opticians” other than the said Optometry Act, if it did. He stated that opticians were usually trained under an optometrist, and of course optometrists were qualified to grind their own lenses (and I presume fill their own prescriptions completely).

When the appellant and Musseau went into partnership it was under the name of W & M Company and business was carried on pursuant to a written partnership agreement. The business of the partnership was to be . . the insurance and optical business.” Musseau was an optician and, in addition, had a small insurance business. It was thought that the partnership would go into real estate investment in due course as well as the hearing aid business. Palmak was incorporated in 1967 and, shortly thereafter, the assets of the partnership as well as the business were sold to it. In the opinion of the appellant, he was an optometrist in the employ of Palmak and Musseau was an optician in the employ of the company. The company hired a person to run the insurance business. The shares of Palmak were owned equally by the appellant and his wife and Musseau and his wife. The supplies for the optical business were on hand at Palmak or, if the prescription were a complex one, they would use the services of a laboratory. Not too long after the incorporation of Palmak, Musseau sold his shares in it to the appellant and Palmak sold to Musseau the insurance business and some laboratory equipment so he could set himself up in business as an optician. Following the purchase of Musseau’s shares, a girl who was trained as an optician was hired to replace him.

In the years in question, Palmak had a bank acount; it was the lessee of the business premises involved in this appeal, for which it paid the rent; and it had a staff of three (including the appellant), all of whom were paid salary by Palmak. However invoices or billings to patients “were sent out in my name, Paul F White, Optometrist.” Payments were received from clients (the payee was not identified) and they were deposited to Palmak’s bank account. In some instances, because of patients’ insurance policies, after they had paid their account they were entitled to a refund. The payer of the cheque for the refund was Palmak. The business’s main supplier in the years in question was Eastern Optical Laboratories Ltd of Dartmouth, Nova Scotia, and all invoices with respect to services rendered were in the name of Paul F White. However they were all paid by Palmak. A motor vehicle was used in the business and it was owned by Palmak. However accounts for services to that vehicle or gas for it could be in either name. Some credit cards which the appellant carried were in his own name while others bore the name of both the appellant and Palmak. Palmak carried insurance (the type was not mentioned) and was the lessee of a post office box. All types of mail went into that box including that addressed to the appellant, Palmak and the insurance agency, and including material addressed to Palmak from the Government of Canada as well as the provincial government. As mentioned, the appellant is a licenced optometrist and, at least in two of the years under appeal, the licence fee was paid by a cheque drawn on Palmak. The appellant explained that if a person wished an examination, a receptionist would take the patient’s case history and he would then examine the patient and, if needed, would write a prescription. That person would take that prescription to the optician of his choice to have it filled. If the filling of that prescription were to be done by Palmak, then one of the opticians would take over and deal with frame selection, measurements, etc. The appellant would be involved in the optical aspect only if the prescription were a complex one. With respect to the years when he was a member of the Optometrical Board, not only had there never been a prosecution or a warning to a corporation for carrying on the business of an optometrist, but also there was never any discussion concerning the propriety or impropriety of a corporation carrying on the business of an optometrist.

The optometrist examines the eyes and, if needed, writes the appropriate prescription. An optician is a person who is trained by an optometrist to supply the appropriate lenses and eyeglass mountings, which includes the appropriate measurements. When Musseau was with Palmak he did grinding of some lenses. However after he left, all the grinding was done off the premises by some third party. The optician would, in effect, complete the optometrist’s prescription by indicating on that prescription the type of frames desired, the measurement for the eyes and other physical information and send thai, in the case of the appellant, usually to Eastern Optical Laboratories Ltd. In due course the completed product would be returned to the appellant where it would be checked and examined before being given to the patient. Apparently in Newfoundland an optician is a person who is trained by an optometrist to do certain work and it is the optometrist under whom he works who decides whether or not the optician performs his duties satisfactorily. After Musseau sold his shares to the appellant and left the employ of Palmak, the business was operated in a slightly different manner than previously in that it took a little longer to get the finished ophthalmic product since the service had to be provided by an independent laboratory. There was no sign around the premises indicating “Palmak Ltd”, while there was a sign saying “Paul F White, Optometrist”. Likewise Palmak was not listed in the telephone book. For the years in question there were two forms of billings to patients and both were in the name of Dr Paul F White, Optometrist. The second of the two forms of billings had a code to indicate the services rendered for which a charge was being made. The ledger card which was used in conjunction with this second form also was in the appellant’s name. Some of those charges on the form related to what were called “optician services”. The receipt for the payment of an account was in the name of the appellant only. Invoices received from Eastern Optical Laboratories Ltd as stated, as well as from Dominion Contact Lens Laboratories Ltd, Metropolitan Optical Ltd and Imperial Optical Company Ltd were all addressed to the appellant with no reference to Palmak although the appellant said it was Palmak who paid those accounts. To the appellant’s knowledge, Palmak was not licensed under the Optometry Act nor was any company ever licenced under that Act. The receptionist answered the telephone in the name of P F White, Optometrist, and made the appointments in that name.

As previously mentioned, the respondent accepted the figures on the profit and loss statement of Palmak as being correct, but then applied them to produce a profit and loss statement for the appellant on the premise that he carried on the business allegedly carried on by Palmak while at the same time he recognized that Palmak was providing a service to the appellant. The value of those services was, as Stated in a letter to the appellant from the respondent dated January 7, 1976, “arbitrarily set”. This amount was considered to be the revenue of Palmak. This amount was reduced by the expenses attributable to Palmak. As stated in the same letter: “We have arbitrarily allocated the expenses as being an actual expense of the company or a reimbursement of an amount paid on behalf of Dr White”. This produced a taxable income to the company of $2,089, $2,640 and $3,046, rather than the reported amounts of $17,259, $16,232 and $34,556 for the 1972, 1973 and 1974 taxation years respectively. The total income of the appellant was increased in each of those years by the amounts of $15,320, $18,142 and $31,660 respectively because of the respondent’s adjustments.

The appellant’s submission was on a three point basis:

(a) the income tax returns of the appellant and Palmak were correct as filed;

(b) if they were incorrect, then the appellant should only be assessed on the basis that his income was from the “optometrist business” and all other income was that of Palmak; and

(c) if neither position (a) nor (b) above were correct and, in principle, the approach of the Minister was correct, then the arbitrary computation of Palmak’s income is too low and the appellant’s too high.

The business was carried on in Corner Brook, Newfoundland, by either the appellant or Palmak. When all the evidence and the appropriate Act of the Province of Newfoundland is considered, as I view it, there was only one business carried on; namely, the combined business of optometrist/opti- cian. There was no delineation between the two as Palmak reported the income from that business as its own, and the respondent, on assessing, did not delineate and assessed all the income to the appellant.

The appellant, in taking the position that Palmak carried on that business, made reference to the decision in MNR v James A Cameron, [1971] CTC 97; [1972] CTC 380; 71 DTC 5069; 72 DTC 6325, at the Exchequer Court and Supreme Court level respectively. He submitted that, like the corporation in that case, Palmak was a duly and properly incorporated company pursuant to the laws of the province in which it carried on business, and that really no one other than the persons immediately involved (that is, the shareholders and persons—another company and its shareholders— with whom it dealt, together with the lawyers and accountants) knew of the existence of the corporation and in the Cameron case it was held that that corporation and not Cameron and his associates was carrying on the business.

There is no doubt that Palmak was a legally incorporated company. However, unlike the corporation in the Cameron case, the persons who dealt with the optometrist business had no idea they were dealing with Palmak, if they were. As far as the business was concerned, the customers of the business—the patients of the optometrist business—had no knowledge of Palmak or its existence: its name appeared nowhere, it was not listed in the telephone book, and the invoice and the receipts for payment for all services were in the name of the appellant. A few individuals did receive a cheque of which Palmak was the payer, the cheque being a refund because of insurance proceeds. I presume they knew the money was coming to them from their association with the appellant and, since they received the cheque through or from him, they were satisfied the cheque was valid. There was no indication to those persons that the cheque was a refund to them for services rendered to them by Palmak. A truck was registered in the name of Palmak, the lease was in Palmak’s name, purchases at a garage were sometimes in the appellant’s name and sometimes in Palmak’s. On at least two occasions the appellant’s annual fee to the Newfoundland Optometrical Board was paid by cheque drawn on Palmak. The licence was in the appellant’s name. It would seem to me, as I mentioned with respect to the cheques issued to patients, that the Board also must have known or have been told that the cheque was for the appellant’s fee. As I read the Optometry Act, it would appear that the person referred to therein is a natural person, not a corporation. I cannot envisage a corporation holding ‘‘a bona fide diploma from any generally recognized College of Optometry” (section 5) or that a corporation (the applicant) “is of the full age of twenty-one years, is of good moral character . . In addition to the above, not only was there no evidence that the patients of the business knew they were dealing with Palmak, but also all evidence (invoice receipts) indicated they were dealing with the appellant alone not only for the optometrical services, but also for the optical services. In addition, the suppliers billed the appellant for goods sold, not Palmak.

Counsel for the respondent referred to the cases of Laverne Clifford Kin- dree v MNR, [1965] 1 Ex CR 305; [1964] CTC 386; 64 DTC 5248; and Dr H Hoyle Campbell v Her Majesty the Queen, [1974] 2 FC 658; [1974] CTC 783; 74 DTC 6598, as supporting his position—and I agree that they do. I am of the opinion, on the facts of the instant appeal alone, that the appellant, and not Palmak, carried on the optometrical and optician business.

This leaves unresolved the third branch of the appellant’s submission; namely, that the respondent has attributed too little revenue to Palmak for services it rendered to the appellant. It must be borne in mind that at no time in the relevant period was there a contract that Palmak would provide any services to the appellant. Insofar as the appellant and Palmak were concerned, Palmak did everything—which view was not accepted by the respondent. In summary fashion, the respondent arbitrarily set the revenue of Palmak for services rendered to the appellant at $28,000, $28,000 and $36,500 in 1972,1973 and 1974 respectively. Against those sums the respondent stated that Palmak had expenses of $25,911, $25,360 and $33,454 respectively for the same years, yielding a net income of about 8%, 10% and 9%. Evidence was given by the chartered accountant for both the appelant and Palmak. He stated that he was familiar with management or service companies which are set up to provide services for professional people. In his experience, those companies pay costs and expenses and add 15% of that amount as its fee. Another approach would be 10% of the income of the professional person over and above the expenses. As mentioned, the respondent allowed Palmak only 8%, 10% and 9% in addition to the expenses it incurred on behalf of the appellant, not the 15% which the witness stated was usual. On cross-examination the witness admitted that he had no experience with management companies for opticians, optometrists or ophthalmologists but knew of a dentist who used the 10% approach. In argument on this phase, counsel referred to the case of Jack K Holmes et al v Her Majesty the Queen, [1974] FC 353; [1974] CTC 156; 74 DTC 6143, a decision of Mr Justice Catianach in which the learned judge held that a management fee of 15% over expenses paid was reasonable. The management company had shareholders who were the wives of a group of lawyers who had, by an agreement, arranged to have the management company provide the law firm with managerial services for expenses paid plus 15%. However, in that case there was an agreement as to the arrangement and the company involved filed its income tax return based on a financial statement reflecting what the company received and what the company paid. The Minister did not attack the percentage involved, but rather, disallowed the management fee as an expense to the law firm and increased the income of each member of the firm proportionately.

In the instant case there was no agreement between Palmak and the appellant and no amount was set out as a management fee. Of course the appellant and Palmak were of the view that Palmak was carrying on the business and so there was no need of any agreement between the two. As I view it, having found that the appellant was carrying on the business of an optometrist/optician, Palmak is a service or management company. There was evidence that 15% of expenses was the going rate for management fees, but I find that evidence insufficient to disturb the onus which is on the appellant. The chartered accountant who gave that evidence clearly stated he had no experience with management companies with respect to opticians, optometrists and ophthalmologists. Such being the case, I cannot say the respondent was incorrect in determining Palmak’s income as he did.

The result is, the appeal of the appellant is dismissed. Since I am dismissing the appellant’s appeal, there is no problem with respect to Palmak’s appeal and it is also dismissed.

Appeal dismissed.